A federal judge on Wednesday upheld an initial legal challenge to the Federal Trade Commission’s ban on noncompete agreements, which is set to take effect in September.
Judge Ada Brown granted an injunction requested by several plaintiffs, saying the ban could not be enforced against them pending a final decision.
But while the ruling was preliminary, it said the FTC lacked “substantive regulatory authority” over unfair competitive practices and that the plaintiffs were “likely to succeed on the merits” of their challenge.
Judge Brown of the U.S. District Court for the Northern District of Texas said she expected to issue a final decision by the end of August.
The commission “stands by its clear authority, supported by law and precedent, to issue this rule,” said FTC spokesman Douglas Farrar. He added that the agency would “continue to fight” noncompete clauses in an effort to promote worker mobility and economic growth.
In April, tax firm Ryan LLC filed a lawsuit to block the near-total ban on non-compete clauses, just hours after the FTC voted 3-2 to adopt the ruleThe U.S. Chamber of Commerce later joined the case as a plaintiff, as did the Business Roundtable and two Texas business groups.
Banning noncompete agreements, which prevent workers from changing jobs within the same industry, would boost workers’ incomes by at least $400 billion over the next decade, the FTC estimates. Such agreements affect about one in five American workers, or about 30 million people, according to the agency, whose jurisdiction includes competition and consumer protection issues.
“If you’re not working in the most productive place possible because of a non-compete, that’s a loss to the economy,” Aviv Nevo, director of the FTC’s Bureau of Economics, said at a conference in April.
Business groups say the ban would limit their ability to protect trade secrets and confidential information. The Chamber of Commerce and other groups say the FTC lacks the constitutional and statutory authority to adopt its proposed settlement, which Ryan LLC called “arbitrary, capricious and otherwise unlawful.” Another lawsuit seeking to block the settlement is pending in federal court in Pennsylvania.
But the three Democrats on the five-member commission maintain that the commission can legally issue rules defining unfair competition practices under the FTC Act of 1914, the law that created the agency. Their position has also garnered bipartisan support: Rep. Matt Gaetz, Republican of Florida, argued in a brief filed in the Texas case that the noncompete ban falls “squarely” within the regulatory authority granted to the commission by Congress.
The Supreme Court decision last week Limiting the broad regulatory power of federal agencies could increase the legal hurdles they face.
Mark Goldstein, a labor and employment attorney at Reed Smith in New York, said that even if she limited her case to just the plaintiffs at this point, Judge Brown’s injunction was a strong indication that she would rule the FTC rule invalid, preventing it from taking effect nationwide.
“The writing is on the wall,” Mr. Goldstein said. “I have never seen a court issue a preliminary injunction and then, except in extremely unusual circumstances, issue a final decision that was not consistent with the preliminary injunction.”
As noncompete litigation drags on, some lawyers are already advising employers to begin relying more on various agreements to protect trade secrets and business interests.
In a blog post published after the FTC adopted its noncompete ban, law firm Winston & Strawn suggested that employers adopt alternative measures, such as narrowly tailored nondisclosure agreements and requirements that employees reimburse the company for training costs if they leave before a set period — known as training reimbursement agreement provisions, or TRAPs.
“The emphasis on these additional protections has become more important,” said Kevin Goldstein, an antitrust partner at Winston & Strawn.
But these agreements are under increased scrutiny. The commission’s final rule encompasses “de facto noncompete clauses”—measures that effectively prevent a worker from changing jobs within an industry, even if they don’t qualify as noncompete clauses. And employers are watching for evolving state and federal restrictions on such clauses, including nondisclosure agreements, beyond the FTC’s rule.
While the commission’s vote to ban non-compete clauses has garnered the most attention, action by other federal agencies and state legislatures against agreements that restrict worker mobility is simultaneously increasing.
“There has been a growing hostility toward these deals in general, across the country,” said Christine Bestor Townsend, co-chair of the unfair competition and trade secrets practice group at Ogletree Deakins.
Last month, a National Labor Relations Board judge ruled for the first time that a noncompete clause constitutes an unfair labor practice, in her decision in a wrongful termination case. The judge also broke new ground by barring a nonsolicitation clause, which restricts the solicitation of customers or employees of a former employer; she argued that both types of agreements could cripple protected activities, including union organizing.
This decision follows a note Last year, Labor Council General Counsel Jennifer Abruzzo clarified her view that non-compete clauses in employment contracts violate the National Labor Relations Act except in limited circumstances.
“It’s one thing to get a guidance note from legal counsel, which is meaningful and important,” said Jonathan F. Harris, an associate professor at Loyola Law School in Los Angeles who studies contract and employment law. “And it’s another thing to have the adjudicating side of the NLRB agree with it.”
These types of restrictive covenants tend to discourage workers from organizing, Harris said, “because the consequences of being fired for organizing become even more severe if you can’t find another job afterward.”
Other federal agencies have also gotten in on the act, reviewing a range of employment provisions they say unfairly restrict workers. It’s part of the Biden administration’s broader approach to what it sees as anticompetitive restrictions on worker mobility.
The Consumer Financial Protection Bureau, for example, published a report last summer, on the dangers of provisions requiring workers to repay training costs if they leave their jobs before a certain deadline.
It’s not just a federal initiative: State governments are also stepping in to promote worker mobility—a trend that was underway before the FTC voted to ban noncompete clauses in April, but has gained momentum since.
Last month, the Rhode Island legislature passed a bill to ban non-compete clauses, joining Minnesota, California, Oklahoma and North Dakota. Dozens of other states have passed partial restrictions.
“Minnesota has not turned into a gaping crater,” said Pat Garofalo, director of state and local policy at the American Economic Liberties Project, a progressive think tank, referring to the state’s sweeping ban on noncompete clauses that went into effect last year. “Once one domino falls, a bunch of other dominoes fall after it.”
State laws may also prove more resistant to challenges than federal rules.
“It’s obviously in the best interest of state legislatures to get these rules on the books now,” Garofalo said.
